March 29, 2014

In my real life I'm a tax and finance professional and I've been
sharing my knowledge with other writers for the past three years. I find many people
have problems with the same issues year after year. Are you making these mistakes?
If so, you'll find more ways to solve these problems (and more) in my book Tax Tips for Authors 2014. (Available from
Amazon, Barnes
and Noble, iTunes, SmashwordsARe/OmniLit
and in print)

1. Calling your hobby
a business – or vice versa

The IRS has a pretty strict line between hobby and business,
because businesses get to write their losses off against other income (W-2 or investment
income) which lets them lower their taxes. To be considered a business you need
to have profits in 3 out of the past 5 years. It you're having more years of losses
than profits, the IRS may want you to prove you're a real business, which means
show that you are trying to make money. They look at the ratio of expenses to earnings
and the type of expenses you claim: advertising and other promo help you, but travel
to conventions may hurt you if you're not earning enough to justify the expense.

Businesses that claim to be a hobby are seen as avoiding self-employment
tax, so if you have increasing hobby income, the IRS may force you to file Schedule
C and pay SE tax. Make sure you classify your writing correctly.

2. Not filing quarterly
estimated tax payments

This is one of the most confusing aspects of self-employment
and for authors it's even more complicated: earnings and expenses fluctuate wildly
during the year. Some people just ignore it, then get both a big surprise balance
due in April, plus a penalty for not paying quarterly. There are ways to avoid this,
the easiest being to pay at least 110% of last year's tax bill in quarterly installments.
If you overpay, you'll get a refund, but you'll definitely avoid a penalty. I go
over how to calculate the correct quarterly payments in my book, Tax Tips for Authors
2014.

3. Paying too much self-employment
tax

How do you pay too much? By not taking all the deductions you
can, and by not keeping a careful running balance of profit and loss during the
year. You only pay SE tax when you have over $400 of profits, so if you can reduce
profits (by increasing legitimate spending during the tax year) you can save some
money. Make sure to do a tentative P and L calculation in early December. It may
make sense to register for expensive conventions then rather than waiting till January.
Buy a new computer or pre-pay for advertising. Shift only planned spending rather
than simply spending down your profits carelessly, so you can build your business
rather than just avoid taxes.

4. Missing out on deductions

Most authors I work with don't keep good records of their spending.
This includes mileage driven for "business." Did you write down every
time you drove to the library, book store, airport, etc.? Get in the habit of writing
down your mileage and other expenses every day or two—before you forget—and you'll
see how much more you are able to claim. Keep receipts for books, index cars, notebooks,
stock photos, domain names, lunch with your writing partner, swag, etc. This will
also help you keep a running P and L for filing quarterly payments and making good
year-end spending decisions. I have much more information on proper recordkeeping
and deductions in the book.

5. Mixing business and
personal expenses

Along with the hobby/business issue, this is one of the things
IRS loves to investigate. The best way to keep everything separate—even for sole
proprietors—is to have separate bank accounts and debit or credit cards. It's easy
to have a separate PayPal account just for your writing business, and you can get
a PayPal debit card. An Ally bank account is free and requires no minimum deposit
and they issue debit cards as well. Have all your payments made into the separate
accounts, and spend only from the business PayPal/Ally debit card. If you need to
use a credit card, ask for an additional card from your credit card company and
use the new one only for business. At the end of the year you can get a separate
statement of your business expenses, which makes recordkeeping and organizing deductions
a snap.

Want even more information? Sign up for my Tax Tips Newsletter, or visit
the Tax Tips for Authors website. Best of all, pick up a copy of my book Tax Tips
for Authors 2014. It's got new information for filing 2013 returns, a Schedule
C walkthrough, chapters on self-employment taxes and quarterly payments and a whole
lot more.

Contest

Out of the Gate

Ask a tax question and be entered to win a free registration
to an author-oriented Tax Workshop held by EM Lynley.

About the Author

EM Lynley is a former investment analyst and White House economist.
Now she writes gay erotic romance. She loves books where the hero gets the guy and
the loving is 11 on a scale of 10. Her Precious Gems series is best described as
"Indiana Jones meets Romancing the Stone"—only gayer. The Delectable series
is Gay Romance with Taste. Her books are available in print and e-book from Amazon
& other book distributors.